Beacon Roofing On Shaky Foundation As Analyst's Survey Points To Softness

Even as fears of a setback to the house market compound, primarily due to the rise in bond yields, one analyst deemed it fit to move to the sidelines on Beacon Roofing Supply, Inc. BECN, citing a soft roofing survey.

The Analyst

William Blair's Ryan Merkel downgraded Beacon Roofing from Outperform to Market Perform.

The Thesis

Another soft roofing survey doesn't instill confidence in Beacon Roofing, Merkel said in a Monday note. The analyst surmises organic growth could be negative for the next two quarters on weak volumes from tough comparisons, lack of hailstorms and excessive rain. The analyst noted demand in non-storm-impacted markets was also "a little softer."

Labor shortage as well as elevated inventory levels in the distributor channel are also emerging as major issues, Merkel said. The analyst is modestly concerned about softer pricing, entering into the seasonally slower months.

"Net debt leverage at 6.8 times (4.7 times including synergies) could be uncomfortable for some investors if cycle fears escalate further," Merkel said in a note. Thus, William Blair sees too much uncertainty with no imminent catalyst.

That said, the analyst is confident in the long-term fundamental growth story, while it views the price realization this year as a big positive. The firm also said it doesn't believe fears that roofing is structurally more competitive.

As such, the firm lowered its adjusted EPS estimates for FY2018 to $2.97 and that for FY2019 to $3.50. The firm also sees Q4 2018 EPS at a below-consensus $1.32, due to lower organic sales growth.

Price Action

Beacon Roofing shares traded around $323.35 at time of publication.

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